Banks serve as the backbone of the economy, facilitating lending, deposits, and financial services that keep businesses and consumers moving forward. These institutions have benefited from improved net interest margins and robust credit growth, so it’s no surprise the banking industry has posted a 8.7% gain over the past six months, beating the S&P 500 by 2.2 percentage points.
Although banks have produced good results, only a handful will thrive over the long term as fintech disruptors are rapidly taking market share from traditional institutions. Taking that into account, here are three bank stocks we’re passing on.
Westamerica Bancorporation (WABC)
Market Cap: $1.31 billion
Founded in 1884 and serving communities from Mendocino County in the north to Kern County in the south, Westamerica Bancorporation (NASDAQ: WABC) provides banking services to individuals and small businesses throughout Northern and Central California.
Why Should You Sell WABC?
- Muted 5.9% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Net interest margin dropped by 48.9 basis points (100 basis points = 1 percentage point) over the last two years, implying the firm’s loan book profitability fell as competitors entered the market
- Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 13.7% annually, worse than its revenue
At $53.08 per share, Westamerica Bancorporation trades at 1.3x forward P/B. Read our free research report to see why you should think twice about including WABC in your portfolio.
Live Oak Bancshares (LOB)
Market Cap: $1.88 billion
Founded during the 2008 financial crisis with a vision to reimagine small business banking through technology, Live Oak Bancshares (NYSE: LOB) is a bank holding company that specializes in providing online banking services and SBA-guaranteed loans to small businesses across targeted industries nationwide.
Why Are We Hesitant About LOB?
- Weak unit economics are reflected in its net interest margin of 3.3%, one of the worst among bank companies
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 6.4% annually
Live Oak Bancshares’s stock price of $40.88 implies a valuation ratio of 1.4x forward P/B. To fully understand why you should be careful with LOB, check out our full research report (it’s free).
Commerce Bancshares (CBSH)
Market Cap: $7.96 billion
Founded in 1865 during the post-Civil War economic boom, Commerce Bancshares (NASDAQGS:CBSH) is a Midwest-focused bank holding company that provides retail, commercial, and wealth management services to individuals and businesses.
Why Are We Cautious About CBSH?
- Annual revenue growth of 5.6% over the last five years was below our standards for the banking sector
- 6% annual net interest income growth over the last five years was slower than its banking peers
- Efficiency ratio is expected to worsen by 1.4 percentage points over the next year
Commerce Bancshares is trading at $51.36 per share, or 1.7x forward P/B. Check out our free in-depth research report to learn more about why CBSH doesn’t pass our bar.
Stocks We Like More
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